Service Corporation International — Q1 2018 Form 10-Q
Business context and reporting period. SCI provides funeral, cremation, and cemetery products and services across the United States and Canada. This unaudited report covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017. Amounts below are in millions of dollars unless noted.
Financial performance and condition
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Revenue | $794.5 | $777.7 | Up 2.2% |
| Operating income | $163.7 | $139.9 | Up 17.0%; includes $2.2 hurricane recoveries, net |
| Net income attributable to common stockholders | $82.0 | $174.7 | Down 53.0%; prior-year results included substantial tax benefits |
| Diluted EPS | $0.43 | $0.91 | Share repurchases reduced diluted weighted-average shares to 189.9 million from 192.9 million |
| Operating cash flow | $211.5 | $188.1 | Up $23.4; 2018 included a $5.6 tax refund |
| Capital expenditures | $46.2 | $40.2 | Operating cash flow exceeded capex by $165.2 |
| Total debt | $3,405.9 | $3,472.7 at Dec. 31, 2017 | Weighted-average interest rate was 4.90% |
| Cash and cash equivalents | $219.5 | $330.0 at Dec. 31, 2017 | Cash, cash equivalents, and restricted cash totaled $227.3 |
Funeral revenue was $514.4, up 3.1%; comparable services performed increased 3.7%, while comparable average revenue per service was essentially flat. Comparable funeral operating margin rose 0.8 percentage points to 23.7%. Cemetery revenue was $280.1, up 0.4%; comparable cemetery operating margin increased 3.7 percentage points to 26.9%, with profit aided by lower costs, revenue mix, and new accounting treatment for selling compensation.
At March 31, 2018, current assets were $351.0 and current liabilities were $591.8. SCI reported $781.7 of available borrowing capacity under its bank credit facility. It was compliant with debt covenants; actual leverage was 3.70 against a 4.50 maximum, and interest coverage was 5.24 against a 3.00 minimum. The quarterly dividend declared was $0.17 per share.
Material changes versus the prior comparable period
- Net income declined sharply, chiefly because Q1 2017 included a 77.4% effective tax benefit rate, including tax audit settlement and share-based compensation benefits. Q1 2018 had a 25.7% tax expense rate.
- SCI recorded a $10.1 loss on early debt extinguishment after redeeming $250.0 of 7.625% notes due October 2018, including a $9.6 call premium. It refinanced with bank-facility borrowings.
- Interest expense rose $2.9 to $43.6, which management attributed to higher interest rates and increased floating-rate debt balances.
- Q1 2018 operating results include adoption of the new revenue recognition standard. Adoption increased reported net income by approximately $5.0 versus results without the new guidance and increased opening retained earnings by $172.2. The 2017 comparative income statement was not adjusted for this standard.
- SCI repurchased 3.1 million shares for $118.8 at an average $38.38 per share. Financing cash use increased substantially, also reflecting debt payments and higher dividends.
Outlook, commentary, risks, and unusual items
SCI provided no specific earnings or revenue guidance in the filing. Management described liquidity as adequate and cited operating cash generation, available credit, and a favorable debt maturity profile. Its capital priorities are acquisitions and new construction, dividends, share repurchases, and opportunistic debt repurchases. Management reported an approximately $10.8 billion preneed backlog of future revenue, including insurance-funded contracts not recorded as balance-sheet assets or liabilities.
Management attributed stronger funeral volumes and profits partly to a strong flu season. It also noted that rising cremation mix can pressure average revenue because cremation services generate about half the average revenue of traditional burial services. Other risks include trust investment market volatility and possible funding requirements, surety-bond availability, competition, regulation, litigation, tax uncertainty, and the company’s indebtedness.
Contingencies include wage-and-hour and operational lawsuits, a cemetery burial-practices class action, and an unclaimed-property audit inquiry concerning certain preneed contracts; SCI stated that it could not quantify ultimate liability for these matters. Self-insurance reserves were $75.4. SCI said an adverse outcome in one or more legal matters could materially affect its financial condition, results, or cash flows.
Other notable items: hurricane recoveries were $2.2 net; the prior-year period included an $11.6 pension termination charge and significant tax-related benefits. The company continued evaluating provisional Tax Act estimates. Its combined trusts had no significant investment change in the quarter, while the S&P 500 and Barclays Aggregate Index declined 0.8% and 1.5%, respectively.
Important facts for investors to verify
- Assess earnings excluding the unusual Q1 2017 tax benefits, the 2018 debt-extinguishment loss, hurricane recoveries, and the differing accounting-standard treatment between periods.
- Review the sustainability of funeral volume growth and cemetery margin improvement, including the effects of cremation mix and the flu-season comparison.
- Monitor debt levels, floating-rate exposure, covenant headroom, and the effect of continuing share repurchases and dividends on liquidity.
- Evaluate trust asset performance, funding obligations, and the relationship between the $10.8 billion preneed backlog and associated assets and future cash receipts.
- Track developments in litigation, unclaimed-property inquiries, insurance-funded preneed contracts, and the finalization of Tax Act accounting estimates.